Oil prices slump after OPEC and Russia fail to reach deal

Prices for Brent crude oil dropped by almost a third on May 9th to around US$30/barrel, although a slight recovery has left them trading around 20% lower than last week.

Analysis

The sharp collapse in oil prices reflects the inability of OPEC and Russia to reach an agreement on production cuts on March 6th. The lack of a deal was a huge disappointment for oil markets, which were already anxious about the impact of Covid-19 on the global economy. The situation has only been made worse by Saudi Arabia's subsequent decision on March 7th to offer discounts to its oil buyers and increase output.

The price slump will add to volatility in financial markets - US markets were forced to halt trading on March 9th as the slump worsened - while the world's major oil producing countries will now have to battle for market share as demand weakens. Many US shale producers will face intense pressure to rein in production growth, now that OPEC/Russia efforts to shore up prices has ended, at least for the time being. The two sides may reconsider if prices remain low and the global economy suffers.

However, the slump also offers some potential benefits for countries that are net oil importers. Lower fuel prices will free up household spending and help companies (such as those in logistics) for which fuel costs are a major expense. By depressing inflationary pressures, cheaper fuel could also increase space for monetary policy loosening. Some countries may be able to cut back on fuel subsidies, freeing up fiscal resources for more productive use. Such developments could be helpful to counter the impact of the coronavirus, but will have to be balanced against the deteriorating global economic picture.

Asia is particularly well-placed to benefit if the price of oil remains at its current level (or below) for several months. China, India and Japan are Asia's largest net importers, with China importing 464.5m tonnes of crude oil and 81.9m tonnes of petroleum products in 2018 (compared with combined exports of just 58.4m tonnes). China has tended to view low global oil prices as an opportunity to stockpile. The other major net oil importers in the Asian region are Singapore, South Korea, Taiwan and Thailand. L

Trade in crude oil and petroleum products, 2018

(m tonnes)

Exports

Imports

Balance

China

58.4

546.4

-488.0

India

53.5

258.8

-205.3

Japan

17.6

194.5

-176.9

Singapore

90.3

167.7

-77.4

Other Asia-Pacific

145.5

509.3

-363.8

Source: BP Statistical Review of World Energy, 2019.

Nevertheless, a sustained lowering of fuel costs will cut at the margins of Asia's national energy companies and affect their capital expenditure plans. As the region's net oil exporters, Malaysia, Brunei and Vietnam will also view the prospect of lower prices negatively, as they will weigh on fiscal revenue and limit their ability to implement stimulus policies to counteract the coronavirus. Indonesia has one of the larger oil sectors (as a share of GDP) in Asia, but remains a net oil importer.